What Is Project Finance?

Project finance is the funding (financing) of long-term infrastructure, industrial projects, and public services using a non-recourse or limited recourse financial structure. 
Parties and Their Roles:
• Project Company/Borrower
• Sponsors/Shareholders
• Third-Party Equity Investors
• Banks
• Facility Agent
• Insurance Bank/Account Bank
• Multilateral and Export Credit Agencies
• Operator
• Experts
• Host Government
• Suppliers
• Purchasers
• Insurers
Project Company/Borrower:

• One of the complicating (and interesting) features of most projects is the considerable
number of parties with differing interests that are brought together with the common
aim of being involved to a greater or lesser extent with a successful project.
• It is one of the challenges of those involved with a project to ensure that all of these
parties can work together efficiently and successfully and cooperate in achieving the
project’s overall targets.
• A common feature in many project structures is that different parties will have particular
roles to play.
• This is especially so with many multi-sponsor projects where, for example, one sponsor
may also be the turnkey contractor, whereas another sponsor may be the operator and
yet another sponsor may be a supplier of key raw materials to the project or an off taker
of product from the project.
Sponsors/Shareholders:
• The project sponsors are those companies, agencies or individuals who promote a
project, and bring together the various parties and obtain the necessary permits and
consents necessary to get the project under way.
• They are invariably investors in the equity of the project company and may be debt
providers or guarantors of specific aspects of the project company’s performance.
• The support provided by project sponsors varies from project to project and includes the
giving of comfort letters, cash injection commitments, both pre- and post-completion, as
well as the provision of completion support through guarantees.
• Support is also likely to extend to providing management and technical assistance to the
project company.
Third-Party Equity Investors
• These are investors in a project who invest alongside the sponsors. Unlike the sponsors,
however, these investors are looking at the project purely in terms of a return on their
investments for the benefit of their own shareholders.
• Apart from providing their equity, the investors generally will not participate in the
project in the sense of providing services to the project or being involved in the
construction or operating activities.
• Third-party investors typically will be looking to invest in a project on a much longer time
frame than, say, a typical contractor sponsor, who will in most cases want to sell out once
the construction has been completed.
• Typically, they will require some involvement at board level to monitor their investment.
Banks:
• The sheer scale of many projects dictates that they cannot be financed by a single lender and,
therefore, syndicates of lenders are formed in a great many of the cases for the purpose of
financing projects
• As is usually the case in large syndicated loans, the project loan will be arranged by a smaller
group of arranging banks (which may also underwrite all or a portion of the loan).
• Often the arranging banks are the original signatories to the loan agreement with the syndication
of the loan taking place at a later date.
• In such cases the arranging banks implicitly take the risk that they will be able to sell down the
loan at a later stage.
• This is not to say that banks not having these skills do not participate in project financings, but for
these banks the risks are greater as they must also rely on the judgement of the more
experienced banks.
Insurance Bank/Account Bank:
• The insurance bank, as the title suggests, will be the lender that will undertake the negotiations in
connection with the project insurances on behalf of the lenders.
• It will liaise with an insurance adviser representing the lenders and its job will be to ensure that
the project insurances are completed and documented in a satisfactory manner and that the
lenders’ interests are observed.
• The account bank will be the lender through which all the project cash flows flow.
• There will usually be a disbursement account to monitor disbursements to the borrower and a
proceeds account into which all project receipts will be paid.
• (e.g. insurances, liquidated damages, shareholder payments, maintenance reserves, debt service
reserves).
Operator:
• In most infrastructure projects, where the project vehicle itself is not operating (or
maintaining) the project facility, a separate company will be appointed as operator
once the project facility has achieved completion.
• This company will be responsible for ensuring that the day-to-day operation and
maintenance of the project is undertaken in accordance with pre-agreed parameters
and guidelines.
• As with the contractor, the lenders will be concerned as to the selection of the
operator
• They will want to ensure that the operator not only has a strong balance sheet but
also has a track record of operating similar types of projects successfully.
• The contractor and operator are not usually the same company as very different skills
are involved. However, both play a key role in ensuring the success of a project.
Experts:
• These are the expert consultancies and professional firms appointed by the
lenders to advise them on certain technical aspects of the project.
• The areas where lenders typically seek external specialist advice are on the
technical/engineering aspects of projects as well as insurances and
environmental matters.
• Each of these consultancies/professional firms will be chosen for its expertise in
the particular area and will be retained to provide an initial assessment prior to
financial close and, thereafter, on a periodic basis.
• However, the cost of these consultants/professional firms will be a cost for the
project company to assume and this can be a cause of friction.
Host Government:
• As the name suggests this is the government in whose country the project is
being undertaken.
• The role of the host government in any particular project will vary from project to
project and in some developing countries the host government may be required
to enter into a government support agreement
• At a minimum, the host government is likely to be involved in the issuance of
consents and permits both at the outset of the project and on a periodic basis
throughout the duration of the project.
• Whatever the actual level of involvement the host government of a particular
country plays in project financings, its general attitude and approach towards
foreign financed projects will be crucial in attracting foreign investment.
Suppliers:
• These are the companies that are supplying essential goods and/or services in
connection with a particular project.
• In a power project, for example, the fuel supplier for the project will be one of
the key parties
• Both the contractor and the operator would also fall under this category.
• However, it is not always the case that the suppliers (and for that matter the
purchasers) are as closely tied into a project structure as, say, the contractor and
operator.
• However, it is not always the case that the suppliers (and for that matter the
purchasers) are as closely tied into a project structure as, say, the contractor and
operator.
Purchasers:
• In many projects where the project’s output is not being sold to the general
public, the project company will contract in advance with an identified purchaser
to purchase the project’s output on a long-term basis
• For example, in a gas project there may be a long-term gas offtake contract with a
gas purchaser.
• Likewise in a power project the purchaser/offtaker may be the national energy
authority that has agreed to purchase the power from the plant.
• In some projects essential supplies to the project (such as fuel) and the project’s
output (e.g. electricity) are purchased by the project company or, as the case may
be, sold on “take-or-pay” terms.
Insurers:
• Insurers play a crucial role in most projects.
• If there is a major catastrophe or casualty affecting the project then both the
sponsors and the lenders will be looking to the insurers to cover them against
loss.
• In a great many cases, if there was no insurance cover on a total loss of a facility
then the sponsors and lenders would lose everything.
• Lenders in particular, therefore, pay close attention not only to the cover
provided but also to who is providing that cover.
• In some industries (e.g. the oil industry) some of the very large companies have
set up their own offshore captive insurance companies, either for their own
account or on a syndicate basis with other large companies.